On 1 June 2020, Sam Ltd acquired all the shares in Sato Ltd. At the date of acquisition, all the identifiable net assets of Sato Ltd were at fair value except for inventory which was recorded by the subsidiary at $50,000. The fair value of the inventory was $85,000 at the date of acquisition. The inventory was sold on 1 October 2020 for $80,000. The consolidation entry required on 30 June 2021 is: Group of answer choices
Question
On 1 June 2020, Sam Ltd acquired all the shares in Sato Ltd. At the date of acquisition, all the identifiable net assets of Sato Ltd were at fair value except for inventory which was recorded by the subsidiary at 85,000 at the date of acquisition. The inventory was sold on 1 October 2020 for $80,000. The consolidation entry required on 30 June 2021 is: Group of answer choices
Solution
The consolidation entry required on 30 June 2021 would be to adjust the inventory value from the recorded 85,000 at the date of acquisition. This is done to ensure that the consolidated financial statements present a fair view of the financial position of the group as a whole.
Here are the steps:
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Debit Inventory for 85,000 and the recorded value of $50,000) to adjust the inventory to its fair value.
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Credit Investment in Sato Ltd for $35,000 to reduce the investment account by the amount of the inventory adjustment.
However, since the inventory was sold on 1 October 2020 for 5,000 (the difference between the fair value of 80,000) that needs to be recognized.
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Debit Cost of Goods Sold (COGS) for $5,000 to recognize the loss on the sale of the inventory.
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Credit Inventory for $5,000 to reduce the inventory account by the amount of the loss.
So, the final consolidation entries on 30 June 2021 would be:
- Debit Inventory $35,000
- Credit Investment in Sato Ltd $35,000
- Debit COGS $5,000
- Credit Inventory $5,000
Please note that the exact accounts and amounts may vary depending on the specific accounting policies and practices of the companies involved.
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